Poloz Says Canada Rates on Hold for ‘Quite Some Time’

By Greg Quinn and Andrew Mayeda -
Dec 12, 2013

Bank of Canada Governor Stephen Poloz said his policy interest rate may remain unchanged for
“quite some time” as the central bank weighs the risk of a
sharp correction in housing prices against the threat posed by
persistently low inflation.

Poloz said his October decision to drop language about the
need for future interest rate increases was “more a movement
towards honesty than dovishness,” and that his interest rate
announcements were trying to project a neutral stance.

“We think that interest rates will stay where they are for
quite some time,” Poloz, 58, said at a press conference after a
speech in Montreal today. “So issuing a warning that they are
almost ready to go up -- it’s not the right timing.”

The bank’s key interest rate has been at 1 percent since
September 2010 and will probably remain there through next year
according to a Bloomberg survey of economists. Inflation in the
world’s 11th largest economy has slowed to 0.7 percent, below
the 1 percent to 3 percent target band, and the bank said Dec. 4
that “downside risks to inflation appear to be greater” than
before.

Poloz didn’t comment on the Canadian dollar’s decline in
his remarks and said after the speech its value is set in
financial markets alone. The currency weakened beyond C$1.07 per
U.S. dollar last week for the first time in three years on
speculation the Federal Reserve may curtail U.S. stimulus while
the Bank of Canada keeps borrowing costs low.

No Target

The central bank doesn’t target the exchange rate, Poloz
said in response to questions after his speech. The currency
“is always the right value, because the market always gets it
right,” he said in response to an audience question.

The Canadian dollar fell 0.5 percent to C$1.0639 per U.S.
dollar at 4:13 p.m. in Toronto. It earlier touched C$1.0561, the
strongest since Nov. 29. One dollar buys 93.99 U.S. cents.

“We have identified the risks that we face,” Poloz said
at the press conference, referring to his interest rate
announcement. “Some people consider it less clear, but I
actually consider it more clear.”

Poloz reiterated in his speech the bank is watching the
risk that inflation will stay below its 2 percent target, where
it’s been since May 2012.

“Of course, when we are already below target, as we are
today, we care more about downside risks than upside ones,”
Poloz said in the speech. He reiterated an October projection
that inflation will return to a target he called “sacrosanct”
in about two years.

Bank Dilemma

Poloz’s speech underscored the dilemma the central bank
faces as the economy recovers more slowly than the central bank
forecast while household debt is at record levels as a share of
income.

History has shown financial crises can spark falling
prices, Poloz said, citing the Great Depression and the
deflation that took hold in Japan in the 1990s.

“Today, the concern is that even though policy makers were
successful in avoiding global deflation in the wake of the 2008
crisis, there is still a risk that inflation could creep down
into deflationary territory as the aftershocks of this crisis
persist,” he said.

Canada’s housing market has shown unexpected strength this
year, the central bank said this week, with resales and starts
remaining firm after Finance Minister Jim Flaherty tightened
mortgage rules. The central bank has also warned that record
consumer debt burdens are the main domestic risk to financial
stability.

Record Debt

The ratio of Canadian household debt to disposable income
rose to a record 163.4 percent in the second quarter on
increased mortgage borrowing, and tomorrow Statistics Canada
will update that figure for the third quarter.

Poloz said today home buying has picked up “mainly because
people pulled forward their plans when mortgage rates started to
move up during the summer.”

While the central bank’s base case assumes a “soft
landing” in the nation’s housing market, “there is a risk that
household imbalances could keep building and set the stage for a
sharp correction down the road,” he said.

Gradual Buildup

“We really don’t see those kinds of bubble-like
conditions” in consumer finances and the housing market, Poloz
said at the press conference. “What we have had is a pretty
gradual buildup over more than five years.”

Poloz also said in the speech that the Bank of Canada looks
at risks through two lenses: the economic outlook and inflation,
and financial stability.

“As we navigate these uncharted waters, we are especially
vigilant in our lookout for risks that could push us off
course,” he said.

He downplayed fears that extraordinary monetary policies
employed by central banks around the world could trigger runaway
inflation. “Central banks will need to drain that extra
liquidity from the system at some point, as the economy heals,”
he said. “While I don’t want to underestimate the challenge of
getting that exit exactly right, I am confident that we have the
ability to keep inflation from taking off.”